How to use your RRSP to pay your mortgage

For those tired of paying mortgage interest to a bank, there is a technique that allows you to use your retirement savings to help buy your home or even finance a cottage or investment property.

The technique is known as a self-directed mortgage and is not widely used. In fact, Rowena Chan, a vice president with discount broker TD Waterhouse, says it’s one of the “least common” investments she deals with. But for those who have a mortgage, are looking for a fixed income investment, and have more than $50,000 sitting in their RRSP, it’s an option they might consider.

This is how it works:

There must be cash in your RRSP that you can borrow in what is called a non-arms length mortgage and the transaction must be made through a bank, bank broker or licensed lender. The lump sum is borrowed and applied to the mortgage and like a regular mortgage, a repayment schedule is set up. Those payments go directly into your RRSP and you keep all the interest. The interest rate must be the same as the posted rate at the bank, but like any other mortgage you can shop around for different rates at different lenders.

Gerry Hogenhout firm Hogenhout & Associates Inc. specializes in these investment vehicles. He says anyone thinking of using this investment needs to clearly understand what’s involved, including the fees.

TD Waterhouse charges $250 to set up the account and has an annual $225 account fee. Regardless of the equity in your home, the entire amount has to be insured by CMHC, which is 0.5 per cent of the entire loan. This is a good thing because you are protecting your retirement savings. Also budget about $1,000 for legal and other professional fees.

So it is worth it?

Suppose you have $50,000 cash sitting in your RRSP and a mortgage on your home. You borrow the $50,000 and pay down your mortgage, repaying your RRSP every two weeks over a five-year term. The interest paid is not a contribution, but is treated the same as a dividend payment from a stock you hold in your RRSP.

The current five-year fixed rate is 5.19 per cent. Your bi-weekly payments are $136 and after five years will have paid more than $12,000 in interest and $6000 towards principal. Your fees, insurance costs and legal charges will total approximately $2,625. That leaves more than $9,500 that you would have paid to the bank that is now in your RRSP.

If you take that same $50,000 inside your RRSP and invest it in a fixed rate GIC at the current 2.75 per cent with Ally Bank your investment will grow to $57,369. Total gain approximately $7,300.

And you will still be paying interest on the $50,000 you owe to the bank.

You can also use your self-directed mortgage to lend money to a third party in what is referred to as an arms length mortgage. There’s more risk involved and for this reason you can charge a higher interest rate. The money is lent to a third party who repays it monthly like a normal mortgage. In this case you are often lending to borrowers looking to expand their business into a new property or buy more real estate and the banks won’t lend them the money.

As with all investing, self directed mortgages are not for everyone. They aren’t for those looking to make quick gains. They also require a long-term commitment, because unlike a stock you can’t sell your self-directed mortgage. They also require the account holder to have a large amount of cash in their portfolio that they are willing to invest for the long term. And always there are risks because home values could fall and your mortgage could be more than the property it is backing.

Always consult a financial planner before committing to any investment method.

Rubina Ahmed Haq is a Toronto freelance writer. Reach her at rubinaahmedhaq@gmail.com

Carol Ireland

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